HMI has ambitious plans to expand its in-house brand internationally within the backdrop of a dramatically growing wearables market.

Management expects significant topline revenue growth in Q1 2019 as it continues to invest in proprietary technologies and international versions of its wearable products.

Company

Hefei-based Huami was founded in 2014 to create activity trackers and smartwatches that are effective but fashionable. The biometric and activity data-driven company has sold over 50 million units worldwide.

Management is headed by founder and CEO Huang Wang. Wang has over 15 years of research and development experience in the consumer electronics industry. Wang also pioneered embedded systems for Linux.

Brands include Amazfit, which includes products such as Pace, Arc, Cor, Bip, Moonbeam, and Equator. The company also provides wearable technology for Xiaomi Corp. (HKEX: 1810), a mobile Internet company and global consumer electronics brand, and produces the popular Mi Band.

Although historically focused primarily in China, the company intends to expand its brand focus to North America, Japan, Korea, India, and Southeast Asia.

Strategic partner Xiaomi is a large shareholder and may be included in one of the above-listed entities.

Huami designs and manufactures Amazfit (self-branded wearable products) and Xiaomi Wearable Products. The company is the sole partner of Xiaomi, creating Xiaomi Wearable Products, such as smart bands, watches, scales, and associated accessories.

Recent Performance

After a dip in topline revenue in Q1 2018, the firm has posted consistent and substantial revenue growth since, as the chart shows below:

Gross profit dropped in Q2 2018 but has since recovered to its 2018 high of $12.5 million in Q4 2018.

Diluted earnings per share (EPS) was on a strong growth trajectory for Q2 and Q3 of 2018 but slipped into negative territory in Q4 2018.

The firm finished 2018 earning $0.07 per fully diluted share compared to 2017's result of $0.09 per fully diluted share.

Huami has an uneven record of matching consensus estimates for earnings since the firm began trading on U.S. capital markets, as the chart shows below:

(Source: Seeking Alpha)

Analyst ratings are unanimous with three ‘Buy' ratings and the consensus price target of $17.79 implies a potential upside of 40% from the stock's current price:

(Source: Seeking Alpha)

Commentary

From the most recent earnings call, management highlighted important partnerships the firm has formed, including with McLaren Applied Technologies and Timex.

Both collaborations promise to utilize Huami's product development capabilities as well as extend its distribution channels.

Management also described a continued effort to build on its already significant international product versions, which accounted for 44.2 percent of total shipments in 2018.

In addition, Huami will continue to develop solutions for the health care vertical, working with PAI Health for overseas expansion and with various insurance carriers in the area of health monitoring technologies.

Management also devoted much of its R&D budget to developing proprietary technologies which has been a stated aim in diversifying its revenue streams toward its in-house branded products such as Amazfit.

Amazfit product revenue in 2018 increased by 178 percent over 2017, accounting for 33 percent of total revenue vs. 21 percent in 2017.

For its forward guidance, for Q1 2019, management expects revenue to grow between 28 to 31.4 percent vs. the same quarter in 2018.

With a continued focus on proprietary products and international expansion, Huami will begin to fulfill its promise as a standalone entity away from the shadow of Xiaomi.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)